Will A Facebook IPO Parade Begin? Maybe Not

Finally, the day has come. Facebook begins life as a public company this morning. By any standard, and however the stock performs in its opening minutes, or days, or weeks, this company and the team behind it have accomplished something truly awe-inspiring.

So first, let’s applaud all of the employees, the known and un-sung, who made this happen. Once again, we have reason to marvel at the entire startup ecosystem that has enabled this phenomenon. Whatever happens with the stock, this IPO is a very big deal.

Obviously, it’s a game changer for those Facebook employees who have been toiling away in their cubicles for a few years or more. It’s a big deal for those who contributed (and presumably will continue to contribute) to the company’s growth, and for those in the months and years after the trading starts, who will strategically deploy the funds raised in hopes of spurring company growth for years to come.

Clearly, this IPO is also a huge win for early investors who will realize a well-deserved payday, and possibly for some lucky day-one investors who might make some truly easy short-term money. This also might turn out to be a big day for those looking to buy and hold the stock, but by definition we won’t know that outcome for some time.

However, reports that this IPO will open the door for a fleet of follow-on deals are misguided. A successful IPO can indeed lay out a lovely red carpet for others to tread, as long as the others look a lot like the leader.

Assuming a successful transaction, Facebook’s IPO could make it easier for companies that currently look like Facebook, with the same size and growth dynamics, to cross the public threshold. But at this point, those fitting that description comprise the null set. Regardless of what happens in the weeks ahead, this deal will not be the lead horse in a stampede of IPOs.

The truth is that as markets have settled out from the wild swings common a few years back and as investors are again willing to take incremental risk in search of greater returns, the IPO market is back. So far in 2012 there have been 26 venture backed IPOs, and note that not one needed the “help” of the mis-named “JOBS” act or its removal of investor protections. When investors are focused on growth, rather than preservation of capital, those companies with compelling stories, good models and solid management teams generally receive warm receptions, as they have all year. Those that aren’t deemed ready by investors will likely have to wait.

Truth be told, in the near term the Facebook transaction could make it more difficult for others in the 2012 IPO class to attract long term holders. The dollars institutional funds have to invest at any one time are capped, much more so than they were prior to the 2008 crash.

Formerly, aggressive investors could borrow against their actual assets, allowing them to invest three or more times as much money as they actually had. In the new world order, these investors are required to pick and choose among deals, and purchases of new issues frequently require sales of something else. An enormous deal like this one could, at some accounts, potentially “crowd-out” those that will follow.

Another noteworthy aspect of this largest ever VC backed technology IPO is that it may be the last deal of its ilk. Google and Facebook were vocal that their IPO timing was driven by the requirement that, with more than 500 shareholders, they had to make their financial statements public.

Crafty early investors recently successfully deep-sixed this rule and from now on will be able to hold their most obvious winners longer without sharing with the public markets. The change from 500 to 2000 shareholders makes it easy to delay public access to the superstar companies while they are still in their rapid growth phase. A victory for the few, but a loss for the bigger pool of public investors.

Whatever happens with Facebook’s early trading, let’s all celebrate the success of the people and the system that contributed to this truly stunning accomplishment. Let’s also hope that Facebook’s glory inspires hundreds and thousands of new audacious entrepreneurs. At the same time, perhaps we should also tip our collective hats to the end of an era.

(Lise Buyer is the founding principal of Class V Group and a Wall Street veteran. She was the director of business optimization at Google, where she became a chief architect of its innovative IPO.)

Photo courtesy of Lise Buyer.

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